The Art (and Implications) of the “Short-Pay”

The Art (and Implications) of the “Short-Pay”

Consider the following scenario: Seller claims $100.00 is due for goods provided.  Buyer claims that only $75.00 is owed.  Buyer then mails a check to Seller for $80.00, marked “paid in full”.  What are the consequences if the Seller deposits the check?  Has the Seller waived its rights to the $20.00 balance by accepting the check?  In North Carolina, the answer is likely “yes”.  But, the North Carolina General Assembly recently passed legislation that may strengthen the Seller’s claim to the $20.00 balance, so long as the Seller was proactive in noticing the Buyer.

The legal concept of “accord and satisfaction” is where a separate and secondary agreement is entered into wherein a Creditor/Seller accepts less than is legally due in order to discharge a debt.  Once the new agreement (accord) and payment (satisfaction) is made, even though it is for less than the amount owed, the debt is wiped out.  Said differently, the acceptance of the lesser amount, and payment thereof, replaces the original obligation.  The accord and satisfaction is essentially considered  a substitute contract between the Creditor/Seller and the Debtor/Buyer for settlement of the debt for a different amount than allegedly owed.  That said, Creditors must be cognizant of attempts by Debtors to utilize this legal concept (intentionally, or otherwise) to discharge debts for lesser amounts.  By way of example, a Debtor may attempt to sneak a payment through the Creditor’s accounts receivable system for less than the amount owed.

Under the common law (as codified by the Uniform Commercial Code and the State of North Carolina) If a Creditor received a payment for less than the full amount owed, and said payment contained conspicuous language such as “paid in full” indicating that the payment was tendered as full satisfaction of the debt owed, the Creditor could either: 1) reject the check or 2) cash the check and accept the offer of the lesser sum.  The Creditor would generally not be able to deposit the check containing the conspicuous language, and then make a claim for the balance.  It must be noted that in order for the Debtor to prevail and successfully argue that the balance had been discharged, the Debtor would have to show that the Debtor, in good faith, tendered the check or payment containing the conspicuous language, to settle a bona fide dispute between the parties.

Recognizing the implications and ramifications for Creditors/Sellers of potentially and inadvertently waiving claims for payment, the North Carolina General Assembly recently passed Senate Bill 807 which provides the Creditor/Seller the ability to institute safeguards against potential accord and satisfaction waivers.  Applicable to negotiable instruments (read: checks) tendered on or after October 1, 2016, a Creditor/Seller organization can now protect against potential accord and satisfaction issues by, within a reasonable time before the tender of a payment, sending a statement to the Debtor/Buyer that statements related to disputed debts, including any instrument tendered as full satisfaction of a debt, be sent to a specific, designated person, office or place.  Then, if the instrument or check is not sent to that designated person, office, or place, the balance is not considered waived.  The motivation behind this legislation is to ensure that an organization does not inadvertently waive claims for sums due, by allowing for the specific designation of a person or office in the organization to knowingly accept a payment for a lesser sum.

Based on this new legislation, “best-practices” may now dictate that terms and conditions of sale include the designation of a specific person, office, or place where a buyer/debtor is to direct any statements related to disputed debts or any instruments tendered as full satisfaction.  This would allow the proper vetting of whether or not to accept a payment for less than the amount contractually owed, rather than inadvertently accepting a lesser sum and thereby waiving claims to any balance.  If you have any questions regarding accord and satisfaction, or other contractual terms, please contact our office.

–  Cody R. Loughridge